1 The Social Rate of Return to Investing in Character: An Economic Evaluation of Alberta’s Immigrant Access Fund Small Loan Program J.C. Herbert Emery Ana Ferrer Department of Economics University of Calgary Calgary, Alberta T2N 1N4 [email protected][email protected]March 2010
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I1
The Social Rate of Return to Investing in Character: An Economic
Evaluation of Alberta’s Immigrant Access Fund Small Loan
Program
J.C. Herbert Emery
Calgary, Alberta T2N 1N4
The Social Rate of Return to Investing in Character:
An Economic Evaluation of Alberta’s Immigrant Access Fund Micro
Loan Program
Abstract
Skilled immigrants have been identified as a key source of labour
supply for addressing the
expected labour market shortages in Canada arising from an aging
population and strong
economic growth. The integration of immigrants into the workforce
often requires that they
have the necessary accreditation to work at their chosen
occupation. However, credential
recognition has proven to be a significant labour market barrier
for skilled immigrants. We
estimate the social rate of return of investing in immigrant
credentials by analyzing the results
of the the Immigrant Access Fund (IAF), an institution providing
small loans on a not for
profit basis to assist Alberta immigrants in acquiring the Canadian
accreditation and training
they need to work their field of expertise. Under very conservative
assumptions, our
assessment of the average social return to the IAF loan program
demonstrates that this is a very
high return social program with annual real rates of return of 33%
or more. These returns are
even higher for higher earning occupations such as health and
engineering.
3
Introduction
Skilled immigrant workers have been identified as a key source of
labour supply for addressing
the expected labour market shortages in Canada arising from an
aging population and strong
economic growth (Emery 2006; IAF March 31, 2009). However, the
integration of immigrants into
the workforce requires that they have the necessary accreditation
to work at their chosen
occupation in the Canadian labour market. Credential recognition
has proven to be significant
labour market barrier for skilled immigrants in Canada as evidenced
by the high rates of
underemployment of this group.1 To address the underemployment of
skilled immigrants in
Alberta, the Immigrant Access Fund (IAF) provides small loans on a
not for profit basis to assist
immigrants in acquiring the accreditation and training they need to
work their field of expertise.
These loans assist educated immigrants in moving from low-income
“survival” jobs to jobs that
better utilize their valuable knowledge and skills. Although
anecdotal evidence suggests that the
IAF program has produced successes, there is no analytical evidence
as to the overall economic
value of the program. Our assessment of the social return to the
IAF’s loan program offers a tool to
evaluate the program success and to compare it with other programs
aimed to enhance the
integration of immigrants in the labor market. The annual social
return of the IAF program is
estimated around 33%.
Canada is among the world’s top destinations for immigrants, with
200,000 newcomers
accepted every year. The Canadian visa program emphasizes skills
and education as entrance
requirements in order to facilitate labour market integration of
immigrants. Despite this, reports on
the socio-economic status of immigrants are discouraging.
Immigrants are more likely to work in
low wage occupations, experience higher rates of unemployment, and
be below Low Income Cut
offs (Picot & Hou, 2003; Picot, Hou & Coulombe, 2007). The
underemployment of skilled
immigrants also represents a loss for the Canadian economy in terms
of lower GDP.
Research suggests that for immigrants, difficulty with credential
recognition is at the heart
of this problem. A substantial part of immigrant skills
depreciation concerns the devaluation of
foreign experience (McDonald and Worswick 1997; Green and Worswick
2003), and lower
1 A 2007 IAF report cited that 49 % of skilled immigrants in
Alberta reported that they were overqualified, 45 % were working in
the fields which are not related to what they studied, and 64%
found there was no consideration for their foreign education and/
or for work experience.The IAF study drew these statistics from
International Qualifications Assessment Service (IQAS) Assessment
Services Study, Alberta Employment, Immigration and Industry,
2007
4
literacy skills among immigrants (Ferrer, Green and Riddell, 2005).
While formal education still
has considerable value for immigrants, relative to those who do not
have formal education, the
overall value that the market puts on immigrant skills is below
that of the native born.2 The
assessment and the recognition of immigrants’ foreign credential
appear to depend on factors like
the importance attached to the education-based skills, the
procedure, and the behaviour of
employer in front of the unknown (Reitz, 2001b, Reitz, 2003,
Oreopoulos, 2009).
To address the foreign credential recognition problem, a range of
government and non-
government stakeholders have launched initiatives to help
immigrants in the assessment and
recognition of their foreign credentials. There is a patchwork of
funds available from both profit
and non-profit organizations to support immigrants seeking to
acquire Canadian acrcreditation,
skills upgrading, including language skills, cultural orientation
to the Canadian workplace, resume
writing, etc…. These programs are delivered by federal or
provincial government (the Immigrant
Loans Program, and provincial credential recognition programs in BC
Manitoba and
Saskatchewan), employers, credit unions and banks (HSBC “Passport
Account” and “ICICI Bank
of Canada “Newcomer Accounts”), educational institutions and
micro-credit organizations
(Immigrant Access Fund in AB and the Ottawa Community Loan Fund)
and community
organizations (The Black Creek Micro-Credit Program).3
Microfinance, or small loans programs have been emerging as a
potentially useful approach
for helping immigrants to settle in the host country (The Globe and
Mail Feb. 20, 2010). Interest
in microfinance was spurred in the 1990s when attention was drawn
towards new financial
institutions that aimed to bring financial services to the poor
(The Economist 1997; The New York
Times 1997; San Francisco Examiner 1999; Goetz and Sen Gupta,
1996). Academic research in
the area of microfinance boomed (Besley and Coate, 1995; Brau and
Woller, 2004; Karlan, 2007;
Morduch et Al., 2009; Woller, Dunford & Woodworth, 1999).
Although most of the current
research is focussed on developing countries and the needs of the
very poor, part of the activity in
2 Ferrer and Riddell (2008). The situation was easier for
immigrants in 1960 due to the lack of high levels of education
among the native-born (Baker and Benjamin, 1994; Li, 2001; Reitz,
2001a; Beach and al., 2003). However, rising education levels among
the native born, particularly university graduates, during the
1970s and 1980s reduced the comparative advantage of immigrants,
even though they continued to arrive with relatively high levels of
education and experience. 3 The Black Creek Micro-Credit Program is
a loan support program established in 2007 as a part of the Black
Creek Community Capacity Project, partnering with Access Community
Capital Fund and Alterna Savings to support individuals in the
community who need assistance with funding for business and skills
development.
microfinance challenges in the United-States and Canada differ from
those experienced in South
America and India. A traditional component of microfinance in
developing world, peer monitoring
and joint liability to assist repayment, has proven unsuccessful in
the developed world. In addition,
the socioeconomic structure of developing countries (extensive
public social networks; small size
of the microenterprise sector and increased competition from large
retailer firms) generates a low
demand for loans devoted to buy equipment and finance small
business, the main purpose for
microfinance in third World countries (Morduch and Schreiner, 2001;
Coyle, Wehrell and
MacDonald, 2006). For this reason, microfinance in North America
has mostly focused on
training, which emerges as a much more important constraint in
leaving poverty than financial
constraints are (Morduch and Schreiner, 2001).
Microfinance is a relatively new enterprise in the business of
helping credit constrained
immigrants who are seeking to acquire Canadian accreditation and
education upgrades. Micro-
credit programs target immigrants in temporary need, acting as
lenders of last resort. Immigrants
are expected to have exhausted other sources of financing first,
such as EI grants or student loans,
prior to applying to the IAF for a loan.4 The loans will generally
cover tuition costs with only some
institutions allowing borrowing to cover living expenses and other
costs. In general, the impact of
the programs is small, though growing, and repayment rates are very
high. To date, however, there
has been little effort toward systematic evaluation of these
micro-finance programs.5
The Immigrant Access Fund
The IAF is an Alberta-based not-for-profit organization that with
its partner organizations
provides internationally trained/educated professional and trades
people with loans of up to $5,000
(exceptions to $10,000 are considered) to help with the costs of
tuition fees, books and courses
materials, exam fees, living and travel expenses, qualification
assessment and professional
4 In contrast, it is believed that for profit lenders like banks
have the primary goal of building long term financial
relationships. Unlike the government, these institutions have the
long term goal of becoming financially sustainable, although this
is not currently a reality (Buckley and Griep, 2003). 5 One
evaluation was done for an extinct program (the Immigrant Loan
Program run in Vancouver). Another report by Karim Harji (May,
2007) evaluated the social impact of the Ottawa Community Loan fund
(OCLF). The organisation helps small businesses; give loans for
accreditation of foreign-trained professionals and for social
enterprises/co-ops. It was found that the production of social
value of this organization is significant.
6
association fees, or other things relating to becoming able to work
in their field.6 The IAF is
different from other programs providing micro loans to immigrants
in other provinces in terms of
how it funds its loans (other micro loan programs have bank
partners to fund approved loans), how
it delivers its loans (through loan delivery partners rather than a
bank) and applicant eligibility
(immigrants from all occupations are welcome to apply; other
programs have restrictions). These
unique characteristics have led to IAF being the largest and most
successful micro loan program
for immigrants in Canada.
The IAF program started in Calgary in 2005 and expanded to Edmonton
in August of 2007.
As of October 2009 a total of 375 loans had been approved—233 (62%)
through the Calgary loan
delivery partner Momentum, and 142 (38%) through the Edmonton loan
delivery partner, the
Edmonton Mennonite Centre for Newcomers. The average IAF loan is
$4,619. Since 2007 more
than $1.6 million in loans has been committed and $1.4 million
disbursed. The repayment rate is
98% (only seven loans have been written off), which is extremely
high for a micro loan program.
The high repayment rate is more remarkable given that sixty-five
percent of IAF loan recipients
were unemployed when they applied to the IAF. Of the 35% that were
employed, 50% were
working in ‘survival’ jobs and 50% were working in their field, but
not in positions commensurate
with their skills and experience. Twenty percent of applicants had
monthly expenses that exceeded
their income.
The IAF has a unique operating model in that it partners with other
agencies to deliver its
micro loans. IAF’s Calgary partner is Momentum, and its Edmonton
partner the Edmonton
Mennonite Centre for Newcomers (EMCN). IAF develops strong
relationships with other agencies
and organizations working with immigrants on accreditation,
training, and employment matters
and counts on them to refer their clients to IAF for loans. The IAF
board is diligent not to duplicate
services provided by others, preferring to support those services
by referring IAF clients to them.
The IAF also acts as a lender of last resort where its clientele
consists of applicants who do not
qualify for loans through commercial lenders or government
programs. Loan approvals are based
on the applicant’s character, not their collateral. Loans are
registered with a credit agency, so loan
recipients can build their credit rating in Canada. Interest is
paid at 1.5% above prime; recipients
6 The significant stakeholders/supporters of the loan program are
the loan delivery partners Momentum (Calgary) and the Edmonton
Mennonite Centre for Newcomers; the Alberta government; The Calgary
Foundation; HSBC Bank Canada; RBC Financial Group and the United
Way of Calgary and area.
7
pay interest only while completing their accreditation/training
(maximum two years) and have
another two years to pay back the principal. IAF loans are not
limited to predetermined
occupations but while IAF borrowers represent 63 different
occupations, engineers, accountants,
physicians and nurses account for 50% of loan recipients.
Loans are presently being funded by a $1 million line of credit
which has been secured by
personal guarantees of Calgary business and community leaders. To
date, almost all of IAF’s
operating funds to cover application assessment, loan delivery and
loan administration have been
provided by the provincial and federal governments (since IAF only
recently obtained charitable
status, funding options were limited). Being so heavily dependent
on government for operating
funds leaves the IAF vulnerable to funding cutbacks and shifts in
government priorities. Since
borrowers are only expected to repay the loan principal and prime
plus 1.5 for interest, the IAF is
not recouping these administration and loan delivery costs through
the loan contract. This feature
of the contract means that borrowers benefit from subsidized
borrowing costs.
Administrative and loan delivery costs are substantial for the IAF.
These costs likely lie
between 50% and 100% of the loan principal.7 Private lenders are
unlikely to be enthusiastic
about making small loans like these without charging substantial
interest costs to cover these high
overhead costs. With the IAF program, the borrower repays the loan
principal over 4 years at an
interest rate of prime plus 1.5. The borrower is not charged to
recoup the administration and loan
delivery costs that are roughly equal to the amount of principal.
In other words, the borrower is
subsidized to keep the cost of borrowing reasonable. If this loan
were to be made by a commercial
lender, then presumably the loan repayment would be set so that the
lender covers the opportunity
cost of the funds allocated to the principal and administrative
costs. For example, a borrower
would effectively borrow $10,000 to receive $5,000 in funds for
their use. Over a four year period
at a 5% interest rate, the borrower would have paid a total of
$12,160.8 Accounting for the
7 From email correspondence with Dianne Fehr, 298 loans approved
from the IAF program start to March 31/09 totaling $1,392,845.
Total Administration and loan delivery costs from program start to
March 31/09 was $1,241,806. On the other hand, for the fiscal year
2008/09 the IAF incurred costs of $492, 270 to approve $723,145 in
loans to 159 people, although some of the costs were for managing
existing loans. 8 The continuously compounded interest r can be
calculated as: If v is the cash inflow in the future, p is the cash
outflow now, r is the annual interest rate and T is the time to
cash inflow, we can use the formula ((1+r)^T)*p=v to calculate
total payments on a loan. So if the borrower must repay $10,000 at
5% interest, the total payments over four years would be $12,160.
Since the borrower only received $5,000
8
repayment of the administration loan delivery costs means that the
borrower would have paid an
effective annualized rate of interest of around 22%. If the
repayment of the loan is not guaranteed
then the lender could require an even higher interest to compensate
for the risk.
Who are the IAF Applicants?
In this section we first present the characteristics of the IAF
borrowers based on data collected
by the IAF at the time of the loan application and over the term of
the loan. We compare these
borrowers to the characteristics of recent immigrants to Calgary
and Edmonton according to 2006
Census data. The mean characteristics of loan applicants are
presented in the first column of Table
1. Columns 2 and 4 represent the same values for recent immigrants
to Edmonton and Calgary.
Columns 3 and 5 show changes in the overall fraction of immigrants
arriving between 2001 and
2006 relative to the fraction arriving between 1996 and 2001 for
selected characteristics.
The typical loan IAF applicant is male and has been in Canada for 1
to 2 years before applying
for a loan, although there is a considerable fraction of applicants
that have been in Canada for
more than 5 years (16%). The distribution of time between arrival
and application does not vary
much between the two main cities.
The majority of the applicants reside in Calgary (57%) and the rest
from Edmonton (40%) with
only 3% coming from other Alberta locations. The overall
distribution of borrowers by gender is
fairly equal across cities. The majority of the loan applicants are
from Asia (31%), Africa (31%),
South America (14%) and countries of the Middle East (15%). These
two last groups are more
likely to be in Calgary, while Asians are more likely to apply for
the loan in Edmonton. More
South American and Asian women apply for these loans than immigrant
men from those regions.
Loan applicants were equally likely to be employed (44%) or
unemployed (42%) before
applying to the IAF for a loan. Unemployment seems to be more
prevalent in the city of Calgary
and slightly more prevalent among women. Underemployment is 12%
among all applicants.
However, conditional on working at the time of the loan
application, underemployment is much
higher, about 27%, and is more concentrated among female immigrants
(40%).
in funds and the balance of the loan was administrative costs, the
effective annual interest payment is 22%
=ln($12,160/$5000)/4.
9
When their accreditation plan is completed, three-quarters of
borrowers intend to work in
occupations related to health (39%), engineering (21%), or
finance/accounting (16%). Female
immigrants are overrepresented in health occupations (56% of all
health occupations) and social
sciences – education (60% of all social sciences occupations). Most
of the immigrants are working
toward occupations in regulated professions (81%), this is
particularly so among women (88% of
all women). The variable occupational change is a derived variable
that is equal to one if the
applicant’s area of expertise/occupation before coming to Canada is
not the same as their intended
occupation/accreditation (using two digit occupation categories).
Only a small fraction (14%) plan
to change their occupation category.
Overall accreditation or education plan completion rates are 45%,
and 30% of borrowers
reporting “working in their field”. Completion rates are slightly
higher for men (48%) than women
(41%) and are also higher in Calgary (54%) versus Edmonton (33%).
This is likely due to the
shorter time the Edmonton program has been operational. Conditional
on completing their
accreditation or education plan, 67% of the borrowers report
“working in their field”, which can be
interpreted as a raw measure of success. The rates are similar in
Edmonton (71%) and Calgary
(68%).
Additional tabulations in the appendix indicate the success of loan
applicants. Table A1
summarizes the same characteristics as in Table 1 by loan status
and indicates that loan defaults
are more common among Calgary applicants, among African immigrants
and among those who
have been in Canada for some time before applying for the loan.
Loan applicants in the health
occupations are also more likely to default. Table A2 summarizes
employment and program
characteristics by place of birth and time between arrival and
application. Accreditation program
completion rates are higher among immigrants of European descent
and those from the Middle
East and substantially lower for Asian immigrants. Asian immigrants
report higher rates of
(unconditional) underemployment
Comparing the demographics of loan applicants and the overall
recent immigrants to Calgary
and Edmonton, it is obvious that loan applicants are not
representative of the immigrant
population. Loan applicants are less likely to be women than recent
immigrants to Calgary and
Edmonton. They are also less likely to be Asian and more likely to
come from Africa, Latin
America or the Middle East. Further, they are also over-represented
in the health occupations and
among occupations in natural and applied sciences (engineers). This
implies that increasing
10
immigration levels will not necessarily increase the customer base
of the IAF program. Looking at
columns 3 and 5 reveals that a higher fraction of immigrants
arriving between 2001 and 2006
come from countries more likely to apply for loans (an increase of
4% in immigration from Middle
East and Africa, and a 3% increase in migration from South America
(Calgary only). However, but
the fraction of immigrants in health or engineering occupations has
not increased over the period
considered. This suggest that expansions of the program are
unlikely to come from an increase in
the fraction of immigrants that may benefit from it, but rather
from increasing reaching efforts on
the part of the IAF and its partners.
Methodology for Calculating the Social Rate of Return to the IAF
Loan Program
The near 100% repayment rate for the principal and interest on the
IAF loans made to date means
that direct loan funds are being used in a way that covers their
economic (or opportunity) cost. The
administrative and loan delivery costs are really the more
pertinent feature of the contract that
requires evaluation as they are effectively a subsidy to the
borrower. The use of public funds, or
other donated funds, for this kind of purpose is economically
justified if the social return to that
expenditure exceeds the opportunity cost of those funds. In other
words, would society be better
off investing the funds in risk free bonds or expending them on a
loan program that increases the
earnings and employment outcomes of skilled immigrants?
A standard way for an economist to value the returns to society
from immigrants investing in
accreditation is to use an income based approach. Assuming that the
wages/earnings of a worker
reflect the value of their labour services to society, then lack of
recognition of credentials implies
an underutilization of resources for Canadian society. Lack of
recognition of credentials combined
with a systemic inability to assess these skills, precludes many
qualified immigrants to find
employment according to such qualifications, or even within their
fields of expertise. The gain to
society from recognizing these credentials would be represented by
the gain in income that
immigrants experience after accreditation.
If we wish to assess the value of Canadian accreditation for an
immigrant, we need to assess
the value of the stream of net benefits that they will produce from
now until they retire compared
to the value of the costs of training/credentialing which are
incurred in the present. Since the funds
devoted to training (plus interest) are repaid by the immigrants,
the only costs to consider are the
11
opportunity costs (what could have been earned without
accreditation) and the overhead costs of
managing the fund A, which are at present absorbed by the IAF
rather than paid by the borrower.
As a dollar received in the future has a value of less than one
dollar today due to the
opportunity cost of money, the costs and benefits of the investment
are converted into present
value terms. The present value of a dollar received in t years, is
the amount of money that you
would have to invest today at interest rate r to receive the one
dollar in t years. The net present
value (NPV) of an investment that will generate benefits Bt and
costs Ct in each period t, is the
simple sum of the Present Value of Bt-Ct from the year in which the
project begins to the date at
which the project ends, year T. A value for r is assumed for the
calculation that represents the risk
free, market rate of return to alternative investments (e.g. if you
invested in long term government
bonds instead of education program). This value is usually between
4% and 5%.
Finally, we also consider the uncertainty involved in the
investment. First, the immigrant
maybe unable to finish the program, and second, there is no
guarantee that the immigrant will find
work in his or her area of expertise once accreditation is
completed. In either case, the potential
benefit of training is reduced to pBt, where p is the probability
of successfully completing the
program and finding work in the chosen area of expertise.
( ) Α−
PCPVNPV
In the context of the IAF program, the NPV of the accredited
immigrant is the sum of the
expected present value of benefits minus costs from the year in
which the immigrant completes his
accreditation. We compare these earnings to those obtained
performing an unskilled job for which
no Canadian post secondary education is needed. We consider several
time horizons for the
calculation of the returns. The average age at immigration is
around 30 years and we allow two
years for learning, applying and completing accreditation, hence a
horizon of thirty something
years from age 32 to age 65. If the NPV for the project is a
positive number at the assumed interest
rate, then the project is deemed to be worthwhile. If the NPV is
negative, then the benefits are not
large enough to generate the benchmark rate of return for the funds
invested in the project.
An alternative way to use the NPV formula to evaluate an investment
project is to calculate the
Internal Rate of Return (IRR) to the investment. Instead of
assuming a value for r to calculate the
12
NPV of the project, the costs and benefits are combined according
to the NPV formula, and an
algorithm is used to determine the interest rate that would yield
an NPV of 0 for the project:
( ) 0 1
tt
The IRR is interpreted as the real annual rate of return to the
investment which is directly
comparable to annualized rates of return to other investments like
stocks, bonds, real estate or
IRR’s from other projects.
To do these calculations, a pre-tax age-earnings profile is
generated for someone working with
recognized credentials (for the Bt values) and for what a person
can be expected to earn without
accreditation (for the Ct values). These age-earnings profiles are
estimated by using data from the
public use file of the 2001 census data for the province of Alberta
to fit the earnings profile of an
average individual according to their age and education level as
follows (regression results are
available in the appendix):
Ln(wage) = a + b age + c age2 + d HS edu + e BA edu + f Grad edu +
ε
We use the predicted earnings from this regression to calculate the
net present value, from age
32 to 65, of attaining accreditation. Because the empirical
evidence suggests that immigrant
experience is heavily discounted in Canada, we adjust the age
profile to correspond to that of a
person seven years younger. This corresponds to the idea that
immigrants are likely to be treated as
new entrants in the labor market since their foreign experience is
not recognized. It also allows our
simulated earnings to account for steep returns during the initial
years of work after accreditation.
Estimating the alternative earnings profile for non-accredited
immigrants requires that an
assumption be made about the nature of work they do and the level
of education required for that
work. We use the age-earnings profile for high school graduates as
this alternative. This essentially
assumes that these immigrants are treated as having no
post-secondary credentials in the Alberta
labour market. Compared to the reported levels of unemployment and
underemployment of IAF
borrowers we are going to understate the earnings gain that would
come with accreditation since
the high school graduate earnings are higher. We make this
assumption for two reasons. First, it is
not clear whether the poor labour market situation of IAF borrowers
reflects permanent or
13
temporary situations, or voluntary or involuntary outcomes. Hence,
we make the assumption that
immigrants could obtain the earnings of high school graduates in
the Canadian labour market if
they choose to do so. Second, assuming a better non-accreditation
labour market experience for
immigrants introduces a downward bias in our calculation of the
value of the IAF program. Since
we do not know with absolute confidence what the true earnings
profiles of immigrants are, this
conservative assumption will allow us to think of our calculations
as “lower bounds” for the
program’s values.
The most general way to think about what will influence the social
return to the IAF lending
program is that the social return will be increasing in the size of
the earnings gain of the immigrant
with the credential and the probability of working in a job that
requires the credential, and
decreasing with the size of the upfront administration/loan
delivery costs. The estimated age-
earnings profile for a high school graduate and for a BA degree
holder with a 10% chance of
working in a job that requires and rewards the BA credential are
shown in Figure 1. The two
components of the NPV are represented by the blue and black column,
which measure the present
value of the difference in the income streams and the overhead
costs respectively. The estimated
earnings difference between an accredited and non-accredited
immigrant peaks between 15 and 25
years after accreditation. This is calculated for a 10% chance of
success at completing the program
and finding a job in the field, a 5% interest rate and a 5,000
loan. Clearly, even with a 100% of
principal administration cost, with a NPV of the accreditation of
over $10,000, investing in BA
level accreditation is socially profitable in this scenario.
Occupations have different rates of success, and different earnings
profiles. To account for
these differences and offer as complete a picture as possible of
the value of the IAF program, we
present specific IRR for loans invested in acquiring different
types of Canadian accreditation in a
variety of scenarios. In particular, age-earning profiles are
constructed for individuals in different
occupations. In addition, this strategy allows us to show the
sensitivity of the results to different
assumptions about the post accreditation number of work years, the
probability of success in
completing the program and working in the desired occupation and
the amount borrowed.
Table 2 shows the IRR of loans provided to obtain BA accreditation
(panel 1) and graduate
degree (either MA or PhD) accreditation (panel 2). We offer several
possible scenarios. First, as
mentioned before we consider that accreditation earnings are
achieved with a range of
14
probabilities. This is intended to reflect that either
accreditation may fail, or that, even if
successful, the immigrant may not be able to find a suitable job in
the field or at the desired level.
Second, we consider different ages at which the immigrant will
start working after accreditation.
This is to take into account that the length of time necessary to
acquire the proper credentials
varies by field. Our base age is 32. We examine the sensitivity of
the results to late accreditation
(age 36) that may be more realistic for immigrants in the health
professions (Emery et al, 2006).
Finally we consider two different loan sizes, the maximum amount
provided by the IAF to
international medical graduates (IMGs) ($10,000) and the average
loan size ($5,000). Based on
consultation with the IAF managers, we assume an administrative
cost on the loans of 100%.9
Column 4 in table 2 shows the internal rate of return on a loan to
an immigrant to acquire a
Bachelor’s degree credential. For each scenario, we include the
benchmark case of a no-risk
outcome, characterized by one hundred percent probability of
success in obtaining accreditation
and work in the field of expertise. This no-risk outcome results in
a calculated annual return of one
hundred percent or more to the IAF loan program. This reflects the
fact that compared to the cost
of the loan, the increase in earnings with the credential over the
remaining working life is
enormous. In other scenarios with different risks, age of
accreditation and overhead costs, the IRR
ranges between 0.47 and 0.18. The IRR on graduate accreditation is
even higher, ranging between
1 or more and 0.38. For a given probability of success in obtaining
work with the credential,
smaller loans offer a higher IRR, while lowering the probability of
success reduces the IRR, ceteris
paribus. Columns 5 and 6 show the IRR to specific degrees in Health
sciences and Engineering,
obtained when fitting equation (2) to individuals in the health
industry and the “professional,
scientific and technical services industry”. Overall these
estimates show that the social return on
investments in accreditation are much higher than returns on
conventional financial instruments.
They are also much higher than the total, or social, rates of
return to post-secondary education of
Canadian students (Rathje and Emery 2002, Emery 2005).
The IRR allows for easy comparison between the returns of the
program and alternative assets.
However, given the variation in IRR by probability of success, it
would be interesting to analyze
the program in terms of this variable. We compute the minimum
probability of success necessary
9 These costs likely lie between 50% and 100% of the loan principal
but our choice of 100% produces conservative estimates of rates of
return to the IAF loans program.
15
to yield a 5% return on the loaned funds and the cost of
administering and delivering the loan. This
is a useful tool to keep track of the performance of the IAF’s
loans and maybe useful in guiding the
expansion of the program.10 For our analysis of the minimum
probability of success we have
introduced a change in our calculations. The nature of the
discounting of experience profiles used
in Table 2, presents some problems when applied to the case of
physicians. Because physicians are
paid a predetermined amount by service provided, the same
discounting of experience profiles
used for other occupations may not necessarily apply to an
immigrant that successfully acquires a
license to practice Medicine. Instead, we will consider the fact
that physicians may get lower
earnings during the residency period and while they establish their
practice (for a total of three
years). We maintain the previous experience profile for other
health professionals.
The minimum probability of success necessary to yield a 5% return
on the loan is reported in
Table 3. The first column shows the case for BA credentials and
columns 2 and 3 show the case
for graduate accreditation, relative to working as a high school
graduate or at a job requiring post
secondary level education respectively. In general, variation in
the overhead costs or the age at
which accreditation begins has little influence in the minimum
probability of success. Most of the
variation comes from the accreditation obtained and our assumption
about what is the alternative
income stream of the immigrant if he does not acquire
accreditation. For instance, for a loan to
obtain a Bachelor’s degree credential to yield 5% return, assuming
that the immigrant will
otherwise find a job at the level of a high school graduate, there
needs to be a 70% probability of
success in completing accreditation and finding a job at Bachelor
degree level. This probability
could be lower if the immigrant is obtaining a graduate credential
(60%) or higher, if we are
assuming that the alternative to obtaining the graduate credential
is to work at Bachelor’s degree
level (87%).
These threshold probabilities for IAF value also vary by what field
or occupation the
accreditation is for. For instance, the minimum probability is 63%
for engineers seeking a
Bachelor’s level accreditation. Note that acquiring a graduate
accreditation does not reduce this
probability, even when we assume that the alternative is to work at
high school level. This suggests
that that the net gain of a graduate degree in this field is likely
very small. There is absolutely no
10 It requires, however, that in the future, the program collects
information on the post accreditation outcomes of loan
applicants
16
gain in income from acquiring a graduate credential in engineering
if the immigrant can work at
the Bachelor’s level (Rathje and Emery 2002). In the case of health
professionals other than
physicians, the required minimum probability of success is 56%.
Physicians have the lowest
required minimum probabilities of success, ranging from 34% to 50%
depending on our
assumptions about alternative income streams if the IMG borrower
does not acquire a medical
license.
As of the September 2009 Community Update from the IAF, few of the
occupations
represented by the IAF borrowers are showing success rates that are
high enough to suggest that
the IAF program is generating a social rate of return of 5% per
year. Health related occupations
have a success rate of 39% (33% for physicians and 42% for Bachelor
level accreditation) and
professional occupations have a 43% success rate. However, this
seems to be a product of how
recent the IAF loans had been made such that few borrowers have had
sufficient time to complete
their education and accreditation programs and find work in their
field. Using information about
the date when the loan was approved, we can recalculate the success
rates among immigrants that
obtained the loan more than 18 months ago, hence ensuring that they
had sufficient time to
complete accreditation and find jobs in their fields of expertise.
The overall rate of completion
among this group is 95%, but much lower for the health occupations
(60%) and the professional
occupations (49%) (See figure 2). The number of loan applicants
that report working in their field
of expertise (after 18 months or more into the program) is 64%,
which is not far from the average
minimum probability of success required in table 2. Around 68% of
Health professionals and 65%
of other professional occupations that completed the program are
working in their field of
expertise. Nevertheless, further improvement in the social return
to the program may come from
reducing the overhead/loan delivery costs of the IAF. This could be
achieved through scale
economies (more loans for fixed overhead costs), or by finding more
economical arrangements for
delivering loans, or by having borrowers pay back some portion of
the administrative and loan
delivery costs.
Conclusions
It is estimated that Alberta will have a labour shortage of 100,000
workers by 2015 (Emery,
2006). At the same time, underemployment of skilled immigrants is
estimated to cost the Canadian
17
economy $13 billion/year11. In this context programs that help
Alberta’s immigrants to apply their
skills and experience to help fill that shortage are under scrutiny
by many government agencies
and civic groups. This report evaluates the performance of the IAF
in terms of the internal rate of
return of the loans and the minimum probability of success that
will yield a 5% interest on the
loans. This provides interested parties with a tool to compare the
returns obtained through this
venue with alternative programs. It also suggests venues that may
enhance the social rate of return
of the program.
11 Gordon Nixon, President & CEO of RBC Financial Group, 2006
Immigrant Access Fund Celebration Dinner.
18
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Alberta Employment and Immigration. A Foreign Qualification
Recognition Plan for Alberta announced November 7, 2008 at IAF
Website http://www.iafcanada.org/news.html
IAF 2006 Census Calgary 2006 Census Edmonton
% % 5 year change % 5 year
change
Demographics Female 0.39 0.51 0 0.52 0 Residence: Calgary 0.57 - -
- - Residence: Edmonton 0.40 - - - - Residence: Other 0.03 - -
-
Time between immigration and application Less than 3 0.06
0.23* 0.01* 0.08* 0.01*
3 - 6 months 0.09 6 – 12 months 0.17 1 to 2 years 0.22 2 to 3 years
0.12 3 to 4 years 0.11 4 to 5 years 0.06 More than 5 0.16 - -
-
Place of birth South America 0.14 0.05 0.03 0.06 0.00 Europe 0.11
0.15 -0.03 0.14 -0.06 Africa 0.30 0.10 0.04 0.13 0.04 Middle East
0.15 0.08 0.04 0.10 0.04 Asia 0.31 0.54 -0.04 0.52 0.00
Labor force status before applying Underemployment (unconditional)
0.12 - - - - Employed 0.44 0.69 -0.04 0.62 -0.04
Program results Completed Program 0.45 - - - -
Occupation when completed accreditation Trades 0.03 0.10 -0.02 0.12
-0.03 Health 0.39 0.05 0.00 0.07 -0.01 Natural Resources 0.01
0.17 0.01 0.11 -0.01 IT 0.05 Engineer 0.21 Finances 0.16 0.15 -0.01
0.13 -0.01 Business 0.06 Social Sciences 0.07 0.07 -0.01 0.11 0.02
Other 0.03 0.46 0.04 0.46 0.05
Regulated Trade 0.45 - - - - Regulated Profession 0.81 - - - -
Occupational change 0.14 - - - -
(*) Refers to the percentage of the immigrant population arriving
less than 5 years ago
Source: authors’ calculations using data provided by the IAF on
loan applicants and Statistics Canada, 2006 and 2001 Census of
Population, Statistics Canada catalogue no.
97-564-XCB2006008.
22
Table 2. Internal Rates of Return of Loans Providing Accreditation
Panel 1. Accreditation BA
Overhead Prob Age Accred. IRR (Average) IRR Health* IRR
Engineering
10000 1 32 1 or more 1 or more 1 or more 10000 0.75 32 0.18 1 or
more 0.67 5000 0.75 32 0.33 1 or more 1 or more 5000 0.65 32 0 0.58
0.32
10000 1 36 1 or more 1 or more 1 or more 10000 0.75 36 0.22 0.76 1
or more 5000 0.75 36 0.47 1 or more 1 or more 5000 0.65 36 0 0.83
0.61
Panel 2. Accreditation Grad
Overhead Prob Age Accred. IRR (Average) IRR Health* IRR
Engineering
10000 1 32 1 or more - 1 or more
10000 0.75 32 0.53 - 0.71
5000 0.75 32 1 or more - 1 or more
5000 0.65 32 0.38 - 0.42
10000 1 36 1 or more 1 or more 1 or more 10000 0.75 36 0.84 1 or
more 1 or more
5000 0.75 36 1 or more 1 or more 1 or more
5000 0.65 36 0.54 1 or more 0.76
These estimates assume that individuals work from age 32 or 36,
with the experience profile of a 25 or 29 year old
individual.
23
Table 3. Minimum Probability of Success to yield a 5% interest rate
(1)
BA credentials Graduate credentials
Relative to Post- secondary earnings
General Overhead 10000, age 36 0.71 0.61 0.87 Overhead 10000, age
32 0.71 0.61 0.87 Overhead 5000, age 36 0.70 0.60 0.87 Overhead
5000, age 32 0.70 0.60 0.87
Engineering Overhead 10000, age 36 0.63 0.62 0.99 Overhead 10000,
age 32 0.63 0.62 0.99 Overhead 5000, age 36 0.63 0.62 0.99 Overhead
5000, age 32 0.63 0.62 0.99
Health(2) Overhead 10000, age 36 0.56 0.34 0.51 Overhead 10000, age
32 0.56 0.34 0.51 Overhead 5000, age 36 0.55 0.33 0.50 Overhead
5000, age 32 0.55 0.34 0.50
(1) Except when otherwise indicated, these estimates assume that
individuals work from age 32 or 6 with the experience profile of a
25 or 29 years old.
(2) For the case of graduate credentials in the Health occupations,
we have omitted the experience profile assumed in (1). Instead, we
assume that the individual experiences a three year reduction in
earnings, while completing the residency program and settling into
practice.
24
25
Appendix
Table A1. Characteristic of Loan applicants by Loan Status Active
Written-off Variable Mean Std. Dev. Mean Std. Dev.
Demographics Gender 0.39 0.49 0.38 0.52 Residence: Calgary 0.57
0.50 0.75 0.46 Residence: Edmonton 0.40 0.49 0.25 0.46 Residence:
Other 0.03 0.17 0.00 0.00
Time between immigration and application Less than 3 0.06 0.24 0.00
0.00 3 - 6 months 0.09 0.29 0.00 0.00 6 – 12 months 0.17 0.37 0.00
0.00 1 to 2 years 0.22 0.42 0.25 0.46 2 to 3 years 0.12 0.33 0.25
0.46 3 to 4 years 0.11 0.32 0.00 0.00 4 to 5 years 0.06 0.23 0.13
0.35 More than 5 0.16 0.37 0.38 0.52
Place of birth South America 0.14 0.34 0.13 0.35 Europe 0.11 0.31
0.13 0.35 Africa 0.30 0.46 0.50 0.53 Middle East 0.15 0.35 0.13
0.35 Asia 0.31 0.46 0.13 0.35
Labor force status before applying Underemployment (unconditional)
0.12 0.33 0.00 0.00 Employed 0.44 0.50 0.63 0.52
Program results Completed Program 0.45 0.50 0.38 0.52
Occupation when completed accreditation Trades 0.03 0.17 0.13 0.35
Health 0.39 0.49 0.50 0.53 Natural Resources 0.01 0.07 0.00 0.00
Finances 0.16 0.36 0.13 0.35 IT 0.05 0.22 0.00 0.00 Engineer 0.21
0.41 0.13 0.35 Business 0.06 0.23 0.13 0.35 Social Sciences 0.07
0.25 0.00 0.00 Other 0.03 0.18 0.00 0.00
Regulated Trade 0.45 0.52 Regulated Profession 0.81 0.39 0.86 0.38
Occupational change 0.14 0.35 0.38 0.52
Source: authors’ calculations using data provided by the IAF on
loan applicants
26
Table A 2. Employment Characteristic by Place of Birth and
Gender
Male Female Place of birth
South America Completed Program 0.59 0.31 Underemployed before 0.07
0.19 Employed before 0.22 0.54 Occupational change 0.38 0.08
Europe Completed Program 0.61 0.67 Underemployed before 0 0.17
Employed before 0.3 0.44 Occupational change 0.14 0
Africa Completed Program 0.44 0.37 Underemployed before 0.09 0.17
Employed before 0.53 0.27 Occupational change 0.24 0.07
Middle East Completed Program 0.51 0.53 Underemployed before 0.05
0.06 Employed before 0.46 0.24 Occupational change 0.05 0
Asia Completed Program 0.39 0.38 Underemployed before 0.15 0.19
Employed before 0.51 0.48 Occupational change 0.12 0.14
Total Completed Program 0.47 0.42 Underemployed before 0.09 0.17
Employed before 0.46 0.42 Occupational change 0.18 0.08
Source: authors’ calculations using data provided by the IAF on
loan applicants
27
Regression results General Source | SS df MS Number of obs = 29541
-------------+------------------------------ F( 8, 29532) = 1498.10
Model | 14835.0258 8 1854.37823 Prob > F = 0.0000 Residual |
36555.2841 29532 1.23781945 R-squared = 0.2887
-------------+------------------------------ Adj R-squared = 0.2885
Total | 51390.31 29540 1.73968551 Root MSE = 1.1126
------------------------------------------------------------------------------
lnwg | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
age | .2165554 .0028261 76.63 0.000 .2110161 .2220947 age2 |
-.002353 .0000352 -66.80 0.000 -.002422 -.002284 edu_2 | .2193194
.019052 11.51 0.000 .1819767 .2566621 edu_3 | .4463341 .0233768
19.09 0.000 .4005146 .4921536 edu_4 | .3788685 .020914 18.12 0.000
.3378761 .4198609 edu_5 | .5919368 .0208232 28.43 0.000 .5511225
.6327512 edu_6 | .806562 .0821827 9.81 0.000 .6454802 .9676438
edu_7 | .7455339 .0352019 21.18 0.000 .6765366 .8145312 _cons |
5.121701 .0515388 99.38 0.000 5.020683 5.22272
------------------------------------------------------------------------------
/*health*/ Source | SS df MS Number of obs = 2844
-------------+------------------------------ F( 8, 2835) = 86.15
Model | 758.170457 8 94.7713071 Prob > F = 0.0000 Residual |
3118.70316 2835 1.10007166 R-squared = 0.1956
-------------+------------------------------ Adj R-squared = 0.1933
Total | 3876.87362 2843 1.36365586 Root MSE = 1.0488
------------------------------------------------------------------------------
lnwg | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
age | .1536429 .0102072 15.05 0.000 .1336286 .1736571 age2 |
-.0016184 .000123 -13.15 0.000 -.0018597 -.0013771 edu_2 | .059658
.0815967 0.73 0.465 -.1003368 .2196529 edu_3 | .3041929 .0894185
3.40 0.001 .128861 .4795248 edu_4 | .4753599 .0717081 6.63 0.000
.3347546 .6159651 edu_5 | .6782101 .0735779 9.22 0.000 .5339384
.8224817 edu_6 | 1.192593 .1075177 11.09 0.000 .9817721 1.403414
edu_7 | 1.005821 .1053347 9.55 0.000 .7992803 1.212361 _cons |
6.078335 .2017905 30.12 0.000 5.682664 6.474006
------------------------------------------------------------------------------
/*education*/ Source | SS df MS Number of obs = 2067
-------------+------------------------------ F( 8, 2058) = 95.17
Model | 816.993035 8 102.124129 Prob > F = 0.0000 Residual |
2208.43531 2058 1.07309782 R-squared = 0.2700
-------------+------------------------------ Adj R-squared = 0.2672
Total | 3025.42834 2066 1.46438932 Root MSE = 1.0359
------------------------------------------------------------------------------
lnwg | Coef. Std. Err. t P>|t| [95% Conf. Interval]
28
-------------+----------------------------------------------------------------
age | .1772646 .0118807 14.92 0.000 .1539652 .200564 age2 |
-.0017775 .0001425 -12.48 0.000 -.0020569 -.0014981 edu_2 | .099775
.1058971 0.94 0.346 -.1079016 .3074517 edu_3 | .4859851 .1277553
3.80 0.000 .2354419 .7365283 edu_4 | .5234266 .1077202 4.86 0.000
.3121746 .7346787 edu_5 | .8277403 .0930439 8.90 0.000 .6452704
1.01021 edu_6 | .6844596 .3111234 2.20 0.028 .0743101 1.294609
edu_7 | .9730638 .1003929 9.69 0.000 .7761816 1.169946 _cons |
5.312201 .2415122 22.00 0.000 4.838567 5.785835
------------------------------------------------------------------------------
/* engineering*/ Source | SS df MS Number of obs = 2408
-------------+------------------------------ F( 8, 2399) = 89.69
Model | 757.642249 8 94.7052812 Prob > F = 0.0000 Residual |
2533.1443 2399 1.05591676 R-squared = 0.2302
-------------+------------------------------ Adj R-squared = 0.2277
Total | 3290.78654 2407 1.36717347 Root MSE = 1.0276
------------------------------------------------------------------------------
lnwg | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
age | .2117879 .010655 19.88 0.000 .190894 .2326819 age2 |
-.0023577 .0001304 -18.09 0.000 -.0026133 -.002102 edu_2 | .2218414
.0891024 2.49 0.013 .0471158 .396567 edu_3 | .3798649 .104929 3.62
0.000 .174104 .5856259 edu_4 | .4737558 .0833893 5.68 0.000
.3102333 .6372783 edu_5 | .6899263 .0810633 8.51 0.000 .5309648
.8488877 edu_6 | .5374082 .2942339 1.83 0.068 -.0395708 1.114387
edu_7 | .7001484 .1000705 7.00 0.000 .5039149 .8963819 _cons |
5.445177 .2062136 26.41 0.000 5.040802 5.849553
------------------------------------------------------------------------------
The Social Rate of Return to Investing in Character: An Economic
Evaluation of Alberta’s Immigrant Access Fund Small Loan
Program
The Social Rate of Return to Investing in Character:
An Economic Evaluation of Alberta’s Immigrant Access Fund Micro
Loan Program